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Jul. 28, 2011: Debt issues' impact on Fannie, Freddie, REIT's; bankruptcy & mortgage website; new loan program & modification plan
Rob Chrisman
Heard
on the NPR radio show "Wait, Wait, Don’t Tell Me" from Michael
Feldman: “If the US defaults on their debt and our rating is
downgraded and the US becomes a Third World Nation, will Nike
finally open a plant here?"
"Rob, I can't figure out where the government is going with
Fannie & Freddie. Just look at the recent headline stories,
like, 'High-ranking members of the House Financial Services
Committee have introduced a bipartisan bill that encourages
banks, Fannie Mae and
Freddie Mac to rent foreclosed properties as a way to
reduce REO sales and stabilize house prices and communities,'
and, 'Fannie Mae flushed the multifamily MBS market with
liquidity in the first half by issuing $10.3 billion in
commercial mortgage-backed securities supported by new
multifamily purchases.' On the one hand, some elected officials
are asking the agencies to become landlords, and on the other
hand, down the hall, other elected officials are figuring out
how to phase them out. It sure seems obvious that nothing is
going to be decided for another 16 months, if even then."
The
inability
of the government to come up with a plan for the debt ceiling
and the deficit has forced analysts to ask what may happen to
the agencies when “push comes to shove.” From the agency MBS and
debt markets perspective, under the Housing and Economic
Recovery Act of 2008, if an Enterprise’s liabilities exceed its
assets under GAAP the Treasury provides sufficient capital to
eliminate that deficit in exchange for senior preferred stock.
As we all know, both Fannie and Freddie have received capital
from the Treasury under this agreement over the past several
quarters – but what
happens if one or both lose money in the 2nd
quarter, and request more money and we don’t have a higher
debt ceiling?
As
a few Wall Street research departments point out, HERA 2008 has
a “mandatory receivership” clause for Fannie and Freddie which
takes them out of conservatorship if certain conditions are met
concerning assets versus obligations and lack of ability to pay
debts. Fannie’s 10-Q for the first quarter states, “FHFA has an
obligation to place us into receivership if the Director of FHFA
makes a written determination that our assets are less than our
obligations for a period of 60 days after the filing deadline
for our Form 10-K or Form 10-Q with the SEC." It is highly unlikely that
the debt ceiling will not be raised before the possibility of
Fannie & Freddie moving from conservatorship to
receivership becomes an issue. But every day that the
government fails to put forth a plan, concerns such as this one
will arise, making investors a little more leery.
Others are saying, though, “Without some sort of serious
entitlement reform, we're likely to lose our AAA rating. Does
that really matter? Is there anywhere else for investors to go?”
And thus equity and fixed income investors are pondering and
worrying instead of trading. Traders report that liquidity is
very light, and dealers are struggling to handle both sides of
the risk.
Meanwhile,
Fannie alerted clients of
updates to its seller guide on the Uniform Appraisal
Dataset (UAD) and Uniform Collateral Data Portal requirements,
Qualified participants policy change, Performing modified loans
policy update, Nonstandard payment collection options
clarification, Housing Goals data update, and other
miscellaneous updates. Read all about it at https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/sel1106.pdf
Fannie also updated its forbearance plan requirements, revised
borrower income eligibility guidelines for mortgage
modifications, and reinforced the availability of Home
Affordable Modification Program (HAMP) for FHA-insured mortgage
loans: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1015.pdf.
In addition, with the rollout of the new DU in August, the new
median area incomes will be updated: https://www.efanniemae.com/sf/guides/duguides/dureleasenotes/.
Mortgage
REITs have seen their
prices improve in 2011, and have been viewed as a powerful force
in buying mortgage-backed securities. But their stock prices
have come under pressure this week due to the potential
downgrade of U.S. government debt. For example, two of the most
prominent stocks in the group, American Capital Agency and
Annaly Capital Management, fell as much as 2.5% on Monday alone.
Perhaps this represents a good buying opportunity, especially
with the dividends that some of them pay – around 19% in the
case of AGNC. (They accomplish this through leveraging a strong
balance sheet to buy a portfolio of government-sponsored housing
agency paper on margin.) But if Ginnie, Fannie, and Freddie
securities are downgraded, their prices will drop and yields
rise – not good for the REIT. It may find that it needs to put
up more money to replace the value (like a margin call), and
“collateral haircuts” have increased for U.S. Treasuries, agency
paper and foreign sovereign debt.
Mortgages...bankruptcies...
are
the two of them intertwined? You bet. The National Consumer Law
Center has launched a useful new resource for the bankruptcy
community called the Bankruptcy
Mortgage Project. Those likely to find it handy include
judges, consumers, trustees, mortgage servicers, attorneys, and
academics. It collects all sorts of documents related to
mortgage issues in consumer bankruptcy cases and provides easy,
free access to various local rules, forms, general orders, and
court opinions: http://www.bankruptcymortgageproject.org/.
Real
estate and mortgage fraud - don’t do it. They'll hunt you down.
And take ugly mug shots. http://www.voiceofsandiego.org/housing/article_d26ff7a4-ad82-11e0-99b7-001cc4c002e0.html
It
has been a while since MERS
has been in the mainstream news. But in the last week MERS (a
unit of Merscorp and owned by the agencies and several large
mortgage investors) forbade members to file any more foreclosure
actions in MERS's name. It also required mortgage servicers to
obtain mortgage assignments and record them with county clerks
before beginning foreclosures. Details can be found here: http://www.reuters.com/article/2011/07/27/us-mers-foreclosure-idUSTRE76Q67L20110727.
SIFMA provided
comments to the Board of Governors of the Federal Reserve System
on proposals relating to amendments to Reg. Z (TIL) that would
implement changes to the TILA made by the Dodd-Frank Act: http://www.sifma.org/issues/item.aspx?id…89934840.
Loan servicer Ocwen
Financial announced the rollout to 33 states of a new loan
modification program for borrowers with underwater mortgages.
Its “Shared Appreciation Modification” (SAM) program, writes
down an underwater borrower’s principal balance to 95% LTV,
thereby creating home equity. Then, over three years, the
written-down portion is forgiven in one-third increments, so
long as the homeowner stays current on mortgage payments. Later,
when the house is either sold or refinanced, the borrower must
share 25% of the appreciation with the investor of the loan.
Ocwen believes this approach won’t reward borrower delinquency,
which is always a concern when offering a loan modification.
In
Maryland,
WEI Mortgage Corporation
announced the creation of “custom term mortgages that are
tailored for each borrower's unique needs. This is a unique
option for qualified borrowers that have already paid a
significant number of years on their existing mortgage and
allows the borrowers to refinance into a lower interest rate
without unnecessarily adding additional term. For example, if a
borrower has a 30 year fixed mortgage and has paid it for 8
years, WEI is able to help the borrower take advantage of the
current low interest rate environment and refinance the
remaining 22 years into a custom 22 year term mortgage. This
custom option positions the borrower to pay off the new mortgage
in the same time frame as the original mortgage.” Check it out
at www.weicorp.com.
Stocks and bonds both went in the same direction Wednesday, both
impacted by the uncertainty of the budget and the prospect of a
ratings downgrade. Gold prices rose to another record, the DOW
was down about 200 points, the 10-yr T-note down .250 (2.98%),
and MBS prices were down/worse about .250-.375. (It is unusual
for MBS prices to move as much as, or more than, Treasury
prices.) "US obligations are not a pristine a credit as they use
to be, but they are the 'Best Looking Horse in the Glue
Factory'", said strategist Jeffrey Ho. That is a good quote. But
wait – let’s not forget Europe!
Yesterday
afternoon’s
released of the Fed’s Beige Book wasn’t much cause for
excitement, saying that economic activity is continuing to grow
but at a slower pace. "Most residential real estate activity was
little changed and remained weak," and home prices were flat or
declining for Districts that reported this information.
While
the markets are focused on the US debt negotiations, we still
have some economic news out today along with a $29 billion
7-year note auction. (Yesterday’s auction did not go so well.)
We’ve already had Initial Jobless Claims; later we have Pending
Home Sales. We find the
10-yr nearly unchanged at 2.97% and MBS prices are quiet as
well.
There was a major league player in the 1930’s named Mel Famey.
He was a dominating pitcher but unfortunately he also had a
severe drinking problem. On good days, he was unhittable but on
bad days…not so much.
I can't remember what team he was on, but I know they were in
series contention for the pennant, and the race went right down
to the wire. Back in those days, of course, relief pitchers were
uncommon, and a pitcher was expected to go the distance.
As
the game went along, Mel's team held a one run lead until the
bottom of the 9th.
Mel had, unfortunately, been downing beer between innings and
was clearly not as sharp as he'd started out.
In
the 9th the first batter he faced hit a home run, and
the score was tied. That definitely sobered him up, some, and he
got the next two batters out on sloppy blooper hits that his
middle infielders caught, realizing he was inebriated and
stepping up their game. Two outs – but then he walked the next
three batters. His coach was fuming; the crowd was silent.
Bases loaded, he refocused his bleary eyes and managed to throw
a few strikes. Finally, the count was 3-2. Mel came set and
threw a wobbly pitch that went wide - ball 4, the winning run
walked in, the game and season over. As the jubilant winning
team walked off the field, they passed the dugout and saw
evidence of Mel's drinking, as beer cans were piled on the bench
and scattered on the ground.
One player shook his head in amazement and pointed the debris
out to his teammates: "Check it out - there's the beer that made
Mel Famey walk us."
If
you're
interested, visit my twice-a-month blog at the STRATMOR Group
web site located at
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